Non-Dom Status: Major Tax Reforms from April 2025

The taxation framework for non-domiciled individuals (non-doms) is set to undergo significant changes beginning 6 April 2025. These reforms, proposed under the March 2024 Budget and confirmed with adjustments by Labour, fundamentally alter how non-doms are taxed on income, gains, and inheritance. Here’s a detailed breakdown of what’s changing and the implications for individuals impacted by these reforms.

Current Rules for Non-Doms

1. Remittance Basis
   • Non-doms can claim the remittance basis, ensuring foreign income and gains are taxable in the UK only if remitted to the UK.
   • Charges for Remittance Basis:
     • £30,000 for residents of 7 out of the previous 9 years.
     • £60,000 for residents of 12 out of the previous 14 years.
   • After 15 of the last 20 years of residence, individuals become deemed domiciled and taxed on an arising basis (worldwide income and gains taxable regardless of remittance).
2. Inheritance Tax (IHT)
   • Only UK assets are subject to IHT for non-doms, with foreign assets treated as excluded property.
   • Deemed domiciled individuals are subject to IHT on their worldwide assets.

Key Changes from April 2025

1. Replacement of the Remittance Basis

The remittance basis will be abolished, replaced by a new 4-year Foreign Income and Gains (FIG) regime.

• Eligibility:
  • Individuals who become UK tax resident after a 10-year period of non-UK residence.
  • Includes returning UK-domiciled individuals who have been non-resident for 10 years.
• Key Features:
  • Foreign income and gains are exempt from UK tax for the first 4 years of UK residence.
  • Exempt funds can be brought to the UK without additional tax charges.
  • Tax on UK income and gains continues as usual.
• Restrictions:
  • Personal allowance for income tax (£12,570 in 2025/26) and the CGT annual exemption (£3,000 in 2025/26) are forfeited.
  • Gains on offshore life insurance bonds are not included in FIG relief.

2. Capital Gains Tax (CGT) Rebasing

• Foreign assets of current or past remittance users will be rebased to their 5 April 2017 market value.
• Conditions:
  • Must have claimed remittance basis in at least one tax year between 2017/18 and 2024/25.
  • Individuals domiciled or deemed domiciled in the UK before 2025/26 are ineligible.
• Benefits:
  • Reduces CGT liabilities on future disposals where the rebased value exceeds the original cost.
  • Original cost can still be used if more beneficial.

3. Temporary Repatriation Facility (TRF)

• Non-doms taxed under the remittance basis can remit pre-6 April 2025 foreign income and gains to the UK at reduced rates:
  • 12% for 2025/26 and 2026/27.
  • 15% for 2027/28.
• Remitted funds can be brought to the UK without further tax liabilities.

4. New Residence-Based IHT Regime

• IHT scope for foreign assets will be determined by residence status, not domicile.
• Long-Term Resident (LTR):
  • Defined as an individual older than 20 who has been UK resident for 10 out of the last 20 years.
  • For those under 20, residence is measured as 50% of their lifetime.
  • LTRs are subject to IHT on worldwide assets.
  • The ‘tail’ rule extends IHT liability for former LTRs:
    • Up to 10 years after ceasing UK residence, depending on the length of prior UK residence.

5. Transitional Rules

• Deemed Domicile Individuals:
  • Will remain subject to the current 3-year IHT tail if non-resident by 2025/26.
• Non-Doms Without Deemed Domicile:
  • Exempt from the 3-year tail if non-resident in 2025/26.

Practical Implications

Non-Doms Residing in the UK

• Individuals who have relied on the remittance basis will see increased exposure to UK tax on worldwide income and gains.
• For those with substantial foreign assets, the TRF and CGT rebasing offer opportunities to minimize tax liabilities.

Returning UK-Domiciled Individuals

• The FIG regime provides a tax-efficient transition back to the UK, allowing tax-free foreign income and gains for four years.
• Careful planning is needed to maximize reliefs while managing UK liabilities.

UK Residents Planning to Emigrate

• The new IHT tail rules provide certainty on when foreign assets will fall outside the scope of UK tax.
• Individuals with extensive non-UK assets should consider emigration plans to benefit from these changes.

Estate Planning

• Transitioning to a residence-based IHT regime increases the importance of managing worldwide assets and timing gifts or disposals to minimize tax exposure.
• Offshore trust structures will require review under the new rules, especially with Labour’s proposed tougher provisions.

Key Actions to Consider

1. Assess Impact on Foreign Income and Gains
   • Review how the abolition of remittance basis and introduction of FIG will affect tax liabilities.
2. Plan for IHT Exposure
   • Determine whether LTR status will apply and assess the potential IHT liability on worldwide assets.
3. Utilize Transitional Opportunities
   • Consider claiming remittance basis for 2023/24 or 2024/25 to enable CGT rebasing.
   • Take advantage of the TRF for reduced-rate remittances before 2028.
4. Review Asset Structures
   • Evaluate the tax efficiency of offshore trusts and other structures under the new regime.
5. Seek Specialist Advice
   • The complexity of these changes necessitates professional advice to navigate the reforms and optimize tax outcomes.

Conclusion

The 2025 reforms mark a fundamental shift in how non-doms are taxed in the UK, moving from domicile-based rules to a more residence-focused approach. While transitional measures provide some relief, the changes demand careful planning to mitigate tax impacts and leverage available opportunities.

For tailored advice on managing these changes and preparing for the new rules, contact Merranti Accounting. Our expert team can guide you through the complexities of the non-dom regime and ensure your financial strategy remains robust and compliant.